January, 2004

Off and Running

We've called on seven pacesetters in key facets of our industry to help you chart your course.

By Staff Report

Lace up your running shoes. Indications promise it will be a marathon year. But the road can get a little rocky. To steer around the obstacles and reach the finish line without a blistering will take stamina and strategy. We've called on seven pacesetters in key facets of our industry to help you chart your course.

Builder
Bobby Rayburn, president elect, National Association of Home Builders

The Economy: New housing starts will break another record; they'll continue to pick up as employment and GDP growth continue. Property values will increase in real value, too, so for the next ten year out, things should be good.

Competition: I don't know that it's any tougher. You see new fellows in the marketplace a lot; any time we have a lot of customer demand, there are new guys trying to get in. The large-volume builders' outlook is excellent, with 1 million immigrants and over 3 million new households projected. There's definitely a strong, pent-up demand for housing. The need, the demand and the money are there.

Consolidation: It will continue, especially as high-production builders continue to acquire numbers of like firms. The big guys just get bigger. And dealers are continuing along those lines, too.

Litigation: We'll continue to see some of that. But get good, hard facts to the public and the courts will back down.

Partnering: What I do in building affordable housing in rural Mississippi is, partner with organizations and community action agencies to help families with not a lot of money become homeowners for the first time. Partnerships on the national level are good, too. I will continue to help form additional coalitions to promote affordable housing.

Challenges: We always need to find better ways to help builder members find developable land, promote smart growth, and better educate them on the different pieces and components in the housing industry. We also need to do a better job in educating Americans on the fact that housing is good for the economy.

Manufacturer
Denny Huston, manager, Sales & Marketing, Boise Engineered Wood Products

The Economy: Dealers can expect so see the economy ticking along. Housing starts are taking off, more like the last half of 2003 than the first half. This means there will be product-availability issues. Dealers need to pay very close attention to their side of things in the supply chain.

Consolidation: We'll continue to see more of the same-good or bad, depending on which end of the business you're involved in. It doesn't narrow our market, because it's highly fragmentized, scattered. At times, people want the opportunity to bite off a bigger chunk of the business, but then they want pricing deals-better product pricing.

Litigation: It won't increase nor decrease, although I'm not hearing as much about mold as I used to.

Partnering: Work with your supplier to establish the good relationship you'll need to get the products you need. Buying and selling is always a two-way street. If you think of your supplier as an adversary, the worm will turn. Instead, strive for a win-win relationship. Some remain adversarial, but then you choose whom you want to do business with.

Challenges: With the housing boom, be mindful of the supply chain and get access to the product you need to do business. Watch the need for adequate inventory and work strongly ahead of the order cycle. Watch how long to protect your prices, which are likely to rise. You've got to begin to grow inventories and order further ahead and watch their prices for builders. With engineered wood, there may be more new product development than in any other part of the industry. You'll see lots of innovation, especially in press technology, resin, and combining wood fibers with other materials for a better product.

Dealer
Rick Baumgarten, president, Lee Lumber, Chicago; past chair, NLBMDA

Consolidation: In retail, the larger players will continue to grow through store openings in the consumer arena and through acquisitions by the pro chains. Unfortunately, many independents, especially in small towns, won't make it: What often (with the bank) was the anchor of a town will vanish. At the wholesale and manufacturing level, look for more consolidation. As the home centers expand and set up their own distribution centers, more and more specialty wholesalers will see their sales shrink. Those that choose to recover lost volume by selling directly to contractors are likely to fail. We stop buying from them, and I presume other dealers would, as well.

Litigation: It's scary! Anyone reading this could be a plaintiff in an asbestos suit. Until our Congress is bombarded with grassroots lobbying from all walks of life, the plaintiff's bar will block tort reform. When law firms take 30 to 40 percent cuts of multi-billion- dollar awards, they have huge amounts of dollars to spread around Congress.

Challenges: Concentrate on what you do best, and if there are things you can't do well, don't do 'em anymore.

Economist
Dr. Lynn Michaelis, Markets & Economic Research, Weyerhaeuser Company

The Economy: Refinancing has driven the economy for the past couple of months, but it's coming to an end. The Fed will raise rates and the boom will be over. But tax cuts should offset the end of the refinancing boom. Interest rates will rise in 2004, so it's still a good year: one good year, but then it may stop. The huge budget deficit could be the spoiler. Interest rates will rise sharply, so expect a tougher economy in 2005 and 2006. The housing business will shrink modestly. The dollar is weakening globally but will have to weaken more to help manufacturing. Trade disputes continue to have unintended consequences, like volatility. The big question is, where are we going with the trade dispute?

Product: Supply is the dominant factor. This year, OSB prices are where God intended them to be! Lumber prices are too low, so they will rise. But high prices may cause builders to use less wood, to find alternatives. Price is determined by weather and trade disputes. We're entering another over-supply period. Demand doesn't matter for our industry; the problem is, supply. Oversupply will continue because we have too much capacity. This means a business turnaround will be slow and will be used to pay down debt. The growth in real GDL in 2004 should be 3½ percent.

Remodeler
Mark Brick, C.R., B&E General Contractors, Inc. Milwaukee; chair, National Association of the Remodeling Industry

The Economy: It's been really good for us. It can only get better as long as financial rates stay low-that's the key factor. We [remodelers] haven't really touched homes built in the '80s, the biggest building boom, so I'm very optimistic.

Competition: It's always going to be there, so we separate ourselves by certification through our groups. That way, we stay on top of the pyramid, and more people need to do that down the road; it raises the bar. You stay in business longer, become a better businessman, and provide better service for the customer. The boxes let people know what real prices are; if others are charging too much, it wakes people up; it's good information for people.

Product: The design/builders are becoming better educated, less caught in bad situations, and planning is a large part of it, plus being upfront with customers. I see higher lumber prices coming in; look at the fires around San Diego-a lot of lumber burned. But if you pay for it, you can get it. New products that will be in demand are improved appliances and cabinets (so much going on-different finishes, different components, and more choices). You get savvy by going to several trade shows a year, and building relationships. "Builders build homes, remodelers build dreams"-so we put in better products.

Challenges: Our business is built on service, and on communication. You need both to be successful. The biggest challenge is price. Can you get your dollar for the service offered? Another big one is insurance. Will the government open its eyes? When will it support small business?

Regional Chain
Paul Hilbert, chairman, Lanoga Corporation

The Economy: 2004 should be a decent year; plenty for us, although slower.

Consolidation: I foresee continued consolidation, both in very large and smaller markets. This is a fragmented industry as far as the pro dealers' side, so it's ripe for more mergers, acquisitions and consolidations. Right now, the top ten builders control ten to 12 percent of market share. This means, however, that independent dealers still have 90 percent of market share, which leaves an opportunity for growth and expansion.

We [at Lanoga] are looking for good opportunities for acquisitions; there are a lot of people out there, so as family companies come to grips with succession and planning their financial futures and the prospect of a sale arises, we're interested in being included as an alternative.

Competition: What we're seeing is, as big builders get larger and gain market share, this offers us all a challenge, leading to a trend to more consolidation-and also to operate differently and actively target these big builders. And the builders are ever more oriented to letting us (or forcing us to) do his grunt work: installed sales, more of stuff they don't want to get their hands dirty with. They're shifting to designing, marketing and land development, where there's more opportunity for value- added.

Litigation: I feel better about the construction defects situation and mold. We've gained some in that regard. But it still means dealers have to be very diligent, very vigilant as individuals and as a group. We've got to work together.

Partnering: We haven't made as much progress as we could, and should have, both with suppliers and with customers. There's still too much of this "get three bids"-a waste of time and effort, and shows a lack of trust. No real development of partnership has really begun that would impact both suppliers and customers. Yet we're almost forced to, as competition demands, as opposed to being small-(three bid) minded. You have to be innovative and give meaningful support and incentives to trust you.

Challenges: Distributor
Ron Beal, senior vice president, Orgill, Inc.

The Economy: Indications look positive-but uncertainties very definitely impact our business. Our trucks travel 16 million miles, so anything that impacts oil prices, up or down, impacts us heavily. Also, you can't foresee weather-related factors-cold, hot, wet, dry: all unknowns and all have impact.

Consolidation: Certainly it's happening all across the country. The long-term trend is to continue consolidation at the retail, distributor and supplier level. Having said that, our company is in an expansion mode. Geographically, we're building a distribution center to service the western part of the country, taking on a lot of new customers.

Competition: There's no lack of competition for the customers we serve; boxes are a concern and a growing factor, but a number of customers are thriving in the face of competition. The guys who are prospering are running their business carefully-doing different things, not just whistling in the dark.

Partnering: This business is clearly about people. To keep our customer base healthy, we're very big on service, marketing and training. To keep ahead, a retailer needs to use all resources available to him, and we are a good one.

Challenges: Our challenge is to keep our retail base prosperous and thriving and competitive, to make sure they're successful. That ensures our success. Challenges to dealers include lots of market pressure from new types of competition-suppliers selling direct to large builders and big boxes.